The AI boom's historical warning

The AI boom's historical warning

Data: BIS; Chart: Danielle Alberti/Axios

Today's AI buildout resembles earlier technological revolutions and capital booms that ended in painful busts.

  • That's the new warning from the Bank for International Settlements, a top forum known as the "central bank for central banks."

    • Why it matters: The technological revolutions that transform the economy have a long history of attracting more investment than what near-term returns justify.

  • The risk is that AI follows the same pattern at a moment when the global economy is unusually reliant on a single investment boom to keep the expansion on track.

    • Flashback: Some of the world's greatest technological breakthroughs — canals, railroads, the internet — sparked enormous investment booms, with capital pouring into new infrastructure years before the economic payoff became clear.

    What they're saying: "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions," the BIS wrote in its report.

  • "The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term."
  • If returns disappoint, today's AI spending surge could become "a protracted investment bust," with knock-on effects across the financial system, the BIS said.

    • The big picture: Investors have bid up the valuations of companies expected to dominate AI, lenders have financed an unprecedented infrastructure buildout, and suppliers have expanded to meet that demand.

  • The bets have helped keep financial conditions loose and have supported the global economy.

    • Friction point: If investors begin to question AI's payoff, the hyperscalers could pull back on spending.

  • That could leave engineering firms, data center developers and other suppliers that expanded to support the boom struggling to service the debt they took on to finance that growth.
  • Stress could spread through the fast-growing private credit market, where direct lending funds with exposure to AI borrowers have already begun facing redemption requests, forcing some to liquidate assets and return capital.
  • An AI-led stock market correction could stunt worldwide wealth: "With U.S. stocks accounting for an outsized share of global equity markets ... the wealth impact from a US-led repricing could propagate globally," the BIS wrote.

    • Between the lines: Today's AI boom is unfolding through a highly concentrated ecosystem of hyperscalers, suppliers and private lenders linked by debt and increasingly opaque financing arrangements.

  • Those connections create more pathways for a slowdown to spread through financial markets at a time when policymakers are already confronting stubborn inflation, strained public finances and recurring supply shocks.
  • "Should inflation rise significantly or AI-led investment turn to a bust, the macroeconomic consequences could be amplified by existing financial vulnerabilities," the BIS noted.

    • The bottom line: AI could ultimately deliver supercharged productivity that financial markets expect.

  • Getting there may require navigating a historic investment cycle, inflation pressures and potential financial vulnerabilities that policymakers have never had to confront all at once.